Chart Analysis May 24: US SPX500 ready to take off or sell off?

17:40, May 24th 2016

What’s Happening?
Over the last two months, US indices have been showing signs of peaking as they move from one of the stronger periods of the year seasonally to one of the weaker times. Trading this week, however, suggests that bearish technicals may be failing and US markets may be turning upward again. Changing expectations about the June FOMC meeting and data this week could influence trading.

Over the last two months, US indices have been showing signs of peaking as they move from one of the stronger periods of the year seasonally to one of the weaker times. Trading this week, however, suggests that bearish technicals may be failing and US markets may be turning upward again. Changing expectations about the June FOMC meeting and data this week could influence trading.

Technicals:

Over the last two months, a head and shoulders top had been forming in the US SPX 500. Earlier this month, the right shoulder appeared to complete and the index fell to test the neckline.

Last week, SPX broke the neckline near 2,040 briefly but then rebounded to finish the day above that key level. A hammer candle that day suggested a potential trend reversal. Since then, SPX has been trending higher and on Tuesday, broke out of a short term downtrend. The RSI has confirmed the upturn breaking out of its own downtrend and crossing back above the 50 level.

It now appears that the dip under 2,040 was a bear trap, head fake or false breakdown. Instead of a new downtrend, it appears this year’s seasonal correction may become a sideways consolidation between the 2,040 neckline and the 2,110 head of the failing bearish pattern. Initial resistance on a bounce may appear near 2,085 the shoulder level.

Fundamentals:

Mixed signals about the health of the US economy has created indecision among traders about which way to move the markets. Some figures had been coming in a bit soft like the last nonfarm payrolls but this was offset by strong retail sales and industrial production.

Traders had been expecting that the Fed would hold off on raising interest rates again for a long time but these expectations have changed in the last two weeks following the retail sales report, hawkish Fed minutes and hawkish Fed speakers.

While the initial reaction from the fast money about a potential June rate hike was negative as it rains on their liquidity party, the later, larger reaction has been positive. Bulls have come in recognizing that the Fed considering a rate increase is a sign of a strong economy, positive environment for corporate earnings and the potential that higher earnings rather than lower prices could ease and overvaluation that may have developed in the market lately. These opposing forces, could put US indices into a sideways range as the June 15 decision approaches.

This week, durable goods orders, a GDP update, comments from Fed Chair Yellen Friday, anticipation of the upcoming G-7 summit and other news could keep US markets active.

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